Hiring the top professionals in any business during its initial stage and later expanding resources is the smartest choice. An accountant comes among the priority list of any business, especially for faster-growing SaaS companies. They can make or break your company financially and end in closing down.
Accounting for startups UK plays a vital role in fundraising, managing regular accounting needs, creating and analysing financial reports, and evaluating business performance.
This post will help SaaS startup owners to understand the need to hire an accountant.
Table of content
- What is a SaaS business?
- Why is good accounting important in SaaS companies?
- Why hire a startup accountant for your SaaS startup?
- Wrapping up
What is a SaaS business?
SaaS is the shorthand for software-as-a-service. It has been one of the most popular software delivery models worldwide for the last decade and shows no indication of slowing down its popularity.
SaaS startups host software on their server and allow access to users through a web-based application or the internet. They are sometimes known as cloud-based solutions or hosted solutions.
It is an attractive startup business model for its scalability, simplified maintenance, and cost-effectiveness.
The war of the business model focuses on recurring revenue streams in the form of subscription fees where a user accesses software for a paid license period.
Why is good accounting important in SaaS companies?
SaaS business owners must rely on several matrices, from revenue recognition to understanding R&D or service costs, to VAT, income tax, and other accounting measures.
Good accounting in such companies provides valuable insights into their revenue and operations. Accessing this information for a fast-growing startup helps them grow and change the company’s future.
Hiring the best accountants for startups like SaaS companies offers reliable accounting measures to streamline raising venture capital funds. They help provide reliable financial records and updated financial statements, assist during due diligence, and prevent unintentional tax violations and surprise tax bills.
Why hire a startup accountant for your SaaS startup?
SaaS startups use a subscription model that makes revenue tracking the most challenging task for such companies. They offer features like subscription fees and add-on service fees to customers. Startup accountants can assist businesses in keeping track of their customers’ upgrades, downgrades, or opt-in and out of different services.
Additionally, they require different accounting tools like subscription management software or a recurring billing platform. Understanding the functionalities of such tools while focusing on business operations is difficult for entrepreneurs. Therefore, having reliable startup business accountants assures proper skills, knowledge, and expertise in using such accounting tools and keeps you safe from hefty fines.
What makes SaaS accounting difficult?
Cash-based accounting measures allow startups to count their revenue when receiving money and subtracting costs. It is easy to use and simple for small businesses with little inventory or customer base. However, it is not recommended for SaaS businesses.
Small to large-sized SaaS businesses with subscription-based income need to use an accrual-based accounting system. This method seems complicated as it counts revenue when revenue is earned instead of cash exchanging hands. Additionally, investors and government regulators prefer SaaS business finances to follow accrual accounting.
Follow GAAP rules
Accountants know the Generally Accepted Accounting Principles or GAAP guidelines and regulations that standardise their business accounting methods across any industry. Ensuring GAAP-compliant financial management in your business means creating transparency and consistency in financial reporting.
When other startups may not be required to follow the GAAP accounting principles, it is beneficial for early-stage SaaS startups.
Ensuring SaaS financial reports
Accountants for startups can easily differentiate the accounting needs of ordinary startups and SaaS businesses. Following the GAAP guidelines, these startups need to generate monthly financial reports, including the profit and loss statement, the balance sheet, and the cash flow statement.
Keep track of SaaS metrics
It gives an image of the revenue you expect to earn over a period depending on your customers’ commitments. It is similar to the value of a contract before payment completion. Bookings make owners understand the success of their sales effort and the potential revenue growth.
It is the actual amount billed to customers. Accountants can predict the amount you can collect from customers and understand what money is owed to your company.
● Revenue recognition:
Revenue is the gross income of a business generated from its primary operations, mainly by selling goods and offering services. It represents the total earnings of a company.
According to accrual accounting principles, revenue recognition specifies how and when to record sales and non-operating income as revenue. It requires an accountant to classify the prepayments for services as liabilities known as deferred or unearned revenue.
They help you classify the deferred revenue from the revenue recognised. Once a customer consumes your service, the accountant applies a portion of cash during the month from deferred revenue to revenue.
● MRR and ARR:
SaaS businesses that usually subscription-based services that accumulate recurring revenue and are measured with two metrics:
1. Monthly Recurring Revenue or MRR
2. Annual Recurring Revenue or ARR
Both MRR and ARR measure the predictable revenue stream over a period. First, calculate the MRR by considering:
A. Recurring revenue from all your customers
B. Upgrades and downgrades
D. Customer churn / lost revenue
After calculating MRR, multiply the amount by 12 to find ARR.
The five types of KPIs that SaaS companies need to keep track of are:
- Top of Funnel KPIs
- Revenue KPIs
- Unit Economics KPIs
- Product/Market fit KPIs
- Financial KPIs
Besides all these hurdles, tax is the biggest hurdle for these companies. A startup tax accountant can help you with basic accounting needs while fulfilling your tax obligations.
They can help you understand the eligibility for tax deductions and relief to reduce tax bills without legal issues significantly. Plus, they ensure you are paying the right amount of tax, submitting tax returns on time, and preparing them accurately.
Hiring an accountant for startups is not mandatory; however, having them behind your SaaS business saves you from hurdles and mitigating risks. You can focus on core activities while your financial management and accounting are on the right side.